ISA or SIPP?

[ivahunch]

As a pensioner with grown up children and significant ISAs, is it better to continue the ISA route or to start contributing to a SIPP?

Moderator Message:
Moved from DAK - Chris

[Dod1010]

Not sure I understand why you ask the question. Surely as a pensioner (non working presumably) you cannot contribute that much to a SIPP anyway. I would always go for an ISA because at least the rules have so far been fairly static, the amount we are allowed to contribute per annum keeps rising and we can drawdown tax free. As they say, what's not to like?

With a SIPP of course we get a tax benefit on contributing but pay tax on withdrawal and the rules keep changing so it is very difficult to keep up with what they are and how they apply.

Dod

[newlyretired]

well this thread is said to have moved, but there is no clue on where it has gone

newlyretired

[csearle]

well this thread is said to have moved, but there is no clue on where it has gone

It hasn't gone anywhere, on the contrary, it has arrived! It was moved here from "Does Anybody Know" and is still available there as a link to here.

Regards,
Chris

[greygymsock]

if you have no earnings (pensions don't count as earnings), then you can contribute up to £3600 (including the tax relief) to pensions per tax year, but only while you're under 75.

you get at least 20% tax relief on that £3600, even if you're a non-taxpayer. or more, if you're a higher/additional-rate taxpayer.

when you take money out of a pension again (which you can do at any time, assuming you're over 55 now), you get 25% tax-free, and the rest is taxable income. so you gain a little from the 25% tax-free, assuming that you pay tax at the same rate on the way out that you got relief on the way in. and you gain more if you pay at a lower rate on the way out - e.g. a non-taxpayer gets 20% relief on the way in, but pays nothing on the way out (assuming they are still under the personal allowance, including the ad-hoc income taken from a pension). but you can lose if you're in a higher tax band when you take money out (e.g. because there is another pension which you'll start drawing in the future).

inside a pension, you have pretty much the same investments available as inside an ISA, so the growth of money inside a pension should be the same as growth inside an ISA. so the difference is just the tax saved/paid when money goes into/out of a pension (ISAs having no tax saved/paid when money goes in or out).

actually, that's not quite true. do you mean cash ISAs? because the rates of interest you can get on cash inside a pension are generally much lower than in an ISA.

if your estate is likely to be paying inheritance tax, then paying money into a pension, and not taking it out again, can reduce the inheritance tax bill, because the pension does not form part of your estate.

[ivahunch]

if your estate is likely to be paying inheritance tax, then paying money into a pension, and not taking it out again, can reduce the inheritance tax bill, because the pension does not form part of your estate.

Yes that is one of the key benefits to be considered - certainly until one is 75 years old

[tjh290633]

Don't ignore the way that ISAs can now be transfered to a surviving spouse, without losing the tax shelter.

TJH

[Urbandreamer]

So far so good, but there is a further point that could be made, though its relevence to the OP is moot.

Pensions are not considered part of the estate when you die (now regardless of the former nod and a wink methods). If you die under 75 they are passed down totaly tax free, rather than the ISA possibly being taxed at 40%. After 75 they are taxed at the rate of those who inherit.

I'm still working (and middle aged), but have moved my contributions into my SIPP both because my former pension contributions were "optimised" or low and because my ISA is looking fat. I should say that I have idealogical objections to paying tax, others may feel different (ie inheriting money is a curse and if you have to get rid of it then the state may be as good a charity as any).